Lumen Technologies Inc (LUMN) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to CenturyTel's fourth quarter 2008 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr.

Tony Davis, Vice President of Investor Relations.

Mr.

Davis, you may begin.

Thank you, Sayid.

Good morning everyone, and welcome to our call today to discuss CenturyTel's fourth quarter 2008 earning results released earlier this morning.

During today's call, we will refer to certain non-GAAP financial measures and we have reconciled those measures to GAAP measures in our earnings release, which is available at our Web site at www.CenturyTel.com.

Your host for today's call is Glen Post, Chairman and Chief Executive Officer of CenturyTel.

Joining Glen on our call today is Stewart Ewing, CenturyTel's Executive Vice President and Chief Financial Officer.

Also available during the call today is Karen Puckett, CenturyTel's President and Chief Operating Officer.

We will be making certain forward-looking statements today, particularly as they pertain to guidance for first quarter and full year 2009, selected information regarding 2009 and the pending Embarq transaction, and other outlooks in our business.

Please review our Safe Harbor language found in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

Our call today will be accessible for telephone replay through February 25, 2009, and accessible for webcast replay through March 11, 2009.

For anyone listening to a taped or webcast replay of this call, or for anyone reviewing a written transcript of today's call, please note that all information presented is current only as of today and should be considered valid only as of today, regardless of the date listened to or reviewed.

At this time I'll turn the call over to your host today, Glen Post.

Glen?

Thank you, Tony.

Appreciate you joining us today as we discuss CenturyTel's fourth quarter 2008 operating results and our guidance for our first quarter and full year 2009.

Our diluted earnings per share, excluding non-recurring items was $0.88 for the quarter or $0.05 ahead of the upper end of our previous guidance and $0.06 ahead of First Call consensus of $0.82.

These increased earnings were driven by continuing reduction in our cost structure along with impact of the true up of 2008 income taxes to reflect our effective 2008 income tax rate.

Operating revenues excluding non-recurring items for the quarter were $642.6 million.

which was then our previous revenue guidance of $635 million to $645 million.

Our revenue increases during the quarter were approximately $17 million resulting primarily from growth associated with our 15.5% increase in high-speed Internet customers.

These increases are more than offset by revenue declines of approximately $32 million primarily attributable to previously anticipated access line losses and lower access revenues.

We continue to see strong demand for broadband services during the quarter as we achieved growth and data revenues of 9.5% over the fourth quarter 2007.

This increase was primarily driven by the addition of more than 85,000 high-speed Internet subscribers during the last 12 months.

We also generated strong free cash flow of $114 million during the fourth quarter, for the full year 2008 we generated a record $584 million of free cash flow driven by 12% lower CapEx in 2008 versus 2007.

Our 2008 capital investments were primarily focused on maintenance or sustaining capital.

Also we were focused on increasing our broadband capabilities and our switch digital video operations along with expansion of our core fiber network.

We added nearly 13,300 high-speed Internet subscribers during the fourth quarter, which represents a 2.1% sequential growth in broadband customers.

We entered 2008 with more than 641,000 high-speed Internet subscribers, a 36.3% penetration of DSL-enabled lines, and 32.1% penetration of total access lines.

We experienced access line losses of approximately 42,900 during the quarter, which equates to a full year 2008 loss of 6.4%.

From an overall bundle standpoint, 34.7% of our residential customers are served through one of our bundle offerings compared to 31.5% a year ago.

We also continue to experience solid demand for our satellite video product as we added nearly 13,000 customers during the fourth quarter, and ended 2008 with nearly 118,000 total satellite video subscribers, which is more than double the number we serviced a year ago.

We believe we will continue to see solid demand for this service in the months ahead.

Before I turn the call over to Stewart I'd like to make a few comments regarding operations and progress toward completing the pending transaction with Embarq.

Our bundle offering -- we continue to work toward the remaining federal and state regulatory approvals necessary to close this transaction and continue to expect to close the transaction in the second quarter of the year.

We are excited about this combination and obviously creates a company of impressive scale.

We expect to realize substantial synergies both through increased operational efficiencies and enhanced revenue opportunities.

The transaction is expected to be free cash flow per share accretive in the first full year after closing.

The combined company will be financially strong with pro forma leverage of approximately 2.1 times operating cash flow, including synergies on a full run rate basis.

This strong capital structure should provide us financial fleck built to fund our operational needs going forward, and return substantial capital to our shareholders through both dividends and opportunistic share repurchases.

In addition to our financial strength, the combined company will be strategically and competitively well-positioned.

Both companies have excellent networks so we believe we can leverage to drive increased revenues to roll out new products, both our large consumer base as well as Embarq's diverse mix of business and enterprise customers.

CenturyTel's integrated systems should allow to us realize significant customer service and market efficiencies, both reduce our operating cost and improve the customer care experience.

We believe leveraging the best practices of systems as a combined company along with the greater scale and skill of our operations will strengthen our competitive position in the marketplace.

In summary this combination creates a larger, financially stronger company, which we believe will be well-positioned to significantly increase shareholder value in the months and years ahead.

With that, I'll turn the call over to Stewart to provide additional detail on our results for the fourth quarter and to update you on our financial guidance for 2009.

Thank you, Glen.

During the next few minutes I'll cover some highlights of our fourth quarter 2008 operating results and briefly discuss additional financial matters.

I will conclude my comments this morning with a discussion of first quarter and full year 2009 guidance provided in our earnings release, which was issued earlier today.

As a reminder, all comments regarding actual results for fourth quarter 2008 and 2007 exclude those non-recurring items detailed on the financial statements accompanying the press release.

The fourth quarter 2008 operating revenues decreased 2.3% to $642.6 million from $657.8 million in fourth quarter a year ago, which was in line with our previous guidance.

Voice revenues for fourth quarter 2008 were $215.4 million versus $225.5 million in fourth quarter 2007.

This 4.5% decrease in voice revenues was primarily driven by revenue declines associated with anticipated lower access lines.

Network access revenues were $198.1 million, versus $216.6 million in fourth quarter 2007.

This decline of $18.5 million was primarily driven by revenue declines associated with lower intrastate minutes of use and reduced universal service funding.

Data revenues increased 9.5% from $122.1 million in fourth quarter a year ago, to $133.7 million in fourth quarter of 2008, primarily driven by strong high-speed Internet customer growth and demand for high bandwidth services during the last 12 months that more than offset revenue declines associated with lower dial up Internet revenues.

Fiber transport and CLEC revenues increased 7.2% to $41.2 million in fourth quarter 2008 from $38.5 million in fourth quarter 2007, due to wholesale revenue growth.

Other revenues were $54.2 million compared to $55.1 million in fourth quarter 2007.

Our operating expenses decreased 3% from $473.9 million in fourth quarter 2007 to $459.5 million in fourth quarter 2008.

This decline in operating expenses was primarily driven by lower-cash expenses and lower depreciation expense due to fully depreciated assets which more than offset cost increases associated with the growth of our high-speed Internet customer base.

For fourth quarter 2008, we generated an operating cash flow margin of 48.5%, modestly lower than the fourth quarter 2007 operating cash flow margin of 48.9%.

Operating income for fourth quarter 2008 was $183.1 million.

slightly lower than fourth quarter 2007 operating income of $183.9 million.

Other income was approximately $3 million lower in fourth quarter 2008 than in the same quarter a year ago due to favorable 2006 audit adjustments recorded in fourth quarter 2007 related to a wireless partnership in which CenturyTel owns a 49% Internet.

Net income for the quarter was $87 million.

compared to $89.8 million in fourth quarter 2007.

Overall 2008 was a solid year financially for CenturyTel.

At year end 2008.

CenturyTel's debt to equity ratio was 1.05 to one and net debt to full year 2008 operating cash flow was 2.4 times.

As Glen mentioned earlier, we achieved a record $584 million in annual free cash flow.

So CenturyTel continues to maintain a solid balance sheet with good access to liquidity.

As I'm sure most of you are aware, CenturyTel filed a form S-3 shelf registration statement with the Securities and Exchange Commission on February 9 that is valid for a period of three years.

We filed this shelf to replace our prior shelf registration statement that expired in early December 2008.

I also want to make it clear that CenturyTel does not have any near term plans to issue securities under this prospectus.

Further, as stated in the prospectus, if we were to plan to issue any securities of any nature at any time in the future, we would provide a prospectus supplement at that time containing specific information about the terms of that particular offering.

I also want to make sure that everyone understands that all financing related to the Embarq transaction is in place.

You will recall that on January 23, CenturyTel and Embarq jointly announced that Embarq had entered into an amendment to its current revolving credit facility with its current bank group that is effective upon the close of the transaction.

This amendment to Embarq's credit facility eliminated the need for the $800 million financing commitment letter that CenturyTel had secured at the time of the transaction announcement last October: So to summarize, the shelf registration statement was part of our normal procedure to have a current shelf registration on file with the SEC at all times and there are no current plans to issue any securities under that shelf.

And all financing is in place to complete the Embarq transaction.

Furthermore, long-term debt maturities for CenturyTel are only $20 million in 2009 and $519 million in 2010.

$500 million of which matures in October of 2010.

Through the end of 2010, Embarq has only $4 million in long-term debt maturities.

Accordingly we believe our strong cash flows, limited debt maturities and excellent liquidity position us to take advantage of opportunities and meet any challenges that may arise.

Finally I'd like to discuss the first quarter and full year 2009 guidance provided in our press release this morning.

First the 2009 outlook information in the release we issued this morning in my prepared remarks are for CenturyTel only, and do not include any benefit or impact of the pending acquisition of Embarq.

Additionally, costs incurred by CenturyTel in 2009 related to the pending Embarq acquisition will be treated as non-recurring items, and therefore are also not included in the 2009 outlooks or my comments.

Also, first quarter and full year 2009 guidance are based on shares outstanding as of the end of 2008.

For first quarter 2009, we anticipate total revenues in the range of $628 million to $638 million.

We expect diluted earnings per share for first quarter 2009 to be in the range of $0.77 to $0.81.

This decrease from fourth quarter 2008 is primarily due to increased non-cash pension expense in the range of $0.03 to $0.04 per share, lower universal service funding of about $0.02 per share, the impact of adjusting our effective tax rate in the fourth quarter of 2008 another $0.02 to $0.03 per share and application of a new accounting pronouncement impacting our calculation of EPS about $0.01 share.

These items in the aggregate represent approximately $0.08 to $0.10 per share.

For full year 2009, CenturyTel anticipates operating revenues to be modestly lower than 2008 operating revenues.

The company expects revenue increases associated with the growth in high-speed Internet and data revenues to be more than offset by revenue declines associated with lower access revenues, reduced universal service funding and access line losses.

For full year 2009 CenturyTel anticipates its diluted earnings per share in the range of $3.20 to $3.30.

We outlined a number of items in our earnings release that we expect to impact 2009 that should assist you in updating your 2009 models.

I will not cover those in detail on the call.

However I do want to point out that incremental non-cash pension expense of 50 basis points increase in our 2009 effective tax rate versus 2008 and the new accounting rule regarding calculation of diluted EPS collectively impacts 2009 diluted earnings per share by nearly $0.20.

Finally, from a capital expenditures standpoint, we currently expect full year 2009 capital expenditures, excluding any Embarq related acquisition, integration or post closing capital expenditures to be between $280 million and $300 million, in line with our 2008 capital expenditures, which were $287 million.

That concludes my prepared remarks for today.

At this point, I will ask the operator to provide further instructions for the Q&A portion of our call.

(Operator Instructions).

Simon Flannery.

Okay.

Thank you very much.

Good morning.

It looks like from your guidance that your revenue trends, access line loss trends should be fairly consistent '09 versus '08.

You haven't really talked about the economy that much in your comments.

Perhaps you could give us a little bit of what you are seeing in terms of the impact business versus consumer and what your expectations are over the next several quarters, how it's affecting bad debt, gross adds, churn, things like that.

Thank you.

Simon, I'll start regarding the economic impact, we have seen impact from the economic downturn in the last quarter.

We started seeing a little bit of that in September as we discussed at our last call.

Primarily we are seeing on the business side reduced business starts, business downsizing, business cost cutting, grooming the networks I think is where we've seen it more directly.

We have seen consumers also looking for value, looking to reduce costs where they can.

And we expect the economy to continue to put pressure on voice lines and revenue, but we also expect to continue to see good demand for broadband and for video services in the months ahead, even with where we are with the economy.

So we are seeing some impact and we will continue to see that as virtually every company in our industry and every other industry will see in the months ahead.

I guess what you are starting to see is the real differentiation between the urban and the rural companies that if you compare your results to some of the Bells for example that you are not seeing the sort of pressures they are seeing in the enterprise space.

That's true.

We are not seeing the impact that they are seeing today and it is a differentiator at this point in time.

Okay.

Thank you.

Our next question comes from Batya Levi.

Okay.

Thanks a lot.

I wanted to ask a question on the margins.

Working with all the puts and takes within the guidance, I believe we can assume roughly modest decline in revenues about 2% but somewhat higher decline in EBITDA suggesting margins would be under pressure by about 100 basis points or so.

Pension will be a big driver of that, but so adjusting for that core margin I think is going to be still lower about 50 basis points.

Do you think that's the right way to think about the guidance?

And I also wanted to ask about the cable competition.

Have you seen any change in the competition from cable players in the fourth quarter?

Is your overlap with the region still about 40 to 45% or have you seen an increase in that?

Thank you.

Batya, yes, your analysis of the margins I think is correct.

And regarding the competition, it's in the 43 to 47% range is our estimate and we are seeing some impact in the SoHo space, in the cable competition and some of our markets so they are expanding their offering into the business sector some.

Thank you.

Now our next question comes from Frank Louthan.

Thank you.

Can you give us an idea of where some of the cost containment initiatives are coming from?

Is this more on the billing side or is this maybe potential synergies you've identified looking at Embarq, is there any cash impact from the pension for this year?

Thank you.

Frank, it's mostly personnel related costs and some call center related costs in terms of the cost containment.

But our folks have done a really good job throughout the organization controlling cost.

Additionally we hope to see our fuel costs be a little bit lower in '09 than they were in '08.

And all the pensions this year, we do plan to make a contribution.

We made -- we weren't required to but we made a $50 million contribution at the end of 2008, Frank.

We are not required to make a contribution again in 2009.

We are basically 85% funded to the ABO or PBO, rather, 95% to the ABO.

Our required contribution for 2010 wouldn't be but $4 million.

So we are in pretty good shape there.

Great.

Thanks.

Our next question comes from Michael Rollins.

Hi, good morning.

A couple questions.

First on the Embarq call, I think management described that the planning process for integration was under way.

I was wondering if you can give us an update, in thinking about, if I remember correctly it was $300 million of annual OpEx savings through the merger.

Over what pace should you begin to achieve those synergies in the back half of '09 and into '10, if you can give us some sense there?

Then the second question I had was just regarding just any further thoughts you have on the stimulus package and embedded in your CapEx if you are going to be broadening the coverage for the DSL footprint in terms of homes passed over the course of 2009?

Thanks.

Okay.

First of all on the synergies, we will see some in '09.

They will increase in '10.

We are looking probably 18 months to really see the full impact.

A lot of those synergies will come from moving from CenturyTel's back office systems where we will have a lot of synergy, we will move the billing systems over, the customer care systems over.

A lot of the impact we will see in, into 2011 is our view right now.

They will be significant earlier, but before we see the real impact of the $350 million we are referencing will be the 2011 time frame.

As far as the stimulus package, we do anticipate that we will apply for some broadband grants in our hardest to reach unserved markets and possibly some of the under served markets depending on how NTIA defines those two categories of support.

It's really still too early to the fully understand the eligibility or the application criteria of the legislation.

Like the rest of the industry, we will be looking at the legislation and look for opportunities to seek funding for ourselves.

In working with our communities and states to help them secure funding to meet the infrastructure needs.

Thanks very much.

Our next question comes from Christopher King.

Good morning and thank you.

Just to follow up on the question regarding the stimulus.

I know you guys have made several filings in the past, noting that high transport costs in the rural areas really impede the business model from potentially being what it otherwise would be.

Just was wondering is special access reregulation something that you guys are kind of constantly looking at and has that been a part of your recent discussions with regulators?

Thanks.

We really haven't addressed with our regulators at this point, Chris.

It could be something that we could look at in the months ahead but right now it's not been a key focus for us.

Is the business case for expanding DSL even with the stimulus package being what it is, is the stimulus sufficient enough I guess on a stand alone basis to make that business case work with transport costs being what they are in a lot of your areas?

We are not sure yet.

We don't know how it works.

We don't know enough about it.

We are hoping it will be but we are still in the process of evaluating and wanting to hear really more from the folks who are going to be making the decision on distribution on how they distribute the funds.

Okay.

Thanks very much.

Our next question comes from Donna Jaegers.

Hey, guys, just a follow up sort of to that previous question.

Given that you have the wireless spectrum in both Verizon and AT&T are trying or talking a lot about trying to accelerate their move to LTE, doesn't that open an opportunity for you guys to sort of accelerate your move to LTE, and use it to supply more broadband to the under served rural markets?

Donna, we do like the opportunity that's afforded us through our 700 megahertz spectrum ownership and the fact that Verizon and AT&T announced a pretty aggressive move in 2010 in rolling out 700 megahertz.

That's a positive for us.

Of course our license currently covers 53% of our footprint, and we have plans to try to increase that.

Of course Embarq does not have any of that spectrum, so we will be looking at possible ways to carve out spectrum with the other carriers to gain access to spectrum because we do think it is a very efficient way to provide broadband access in rural areas, so it is an opportunity and also just general access and more efficient access in a lot of our markets as we provide mobility, high-speed data mobility to our customers.

I'm assuming any kind of CapEx dollars on the LTE build out would be in between ten, 2011.

That's right, it will be 2010 before there will be any significant dollars and even that we will roll-out to a few markets and then enter the space on a selective basis as we prove the success of the technology roll-out.

Okay.

And then just one other regulatory question.

Obviously with Chairman Martin gone, there is no momentum on his sort of regulatory plan for the rural companies.

But have you guys, it seems like a lot of the rural players are sort of resigned to the fact that something is going to happen on intra state access.

Can you discuss a little about what your strategy is on intrastate access rates on how you might work with regulators to make that bitter pill a little more palatable.

First of all we support reform in the access, interstate intrastate access process.

We think there should be a unified rate to avoid arbitrage in the system.

We think it needs to be done in a way that rural customers don't suffer and I think that's, we need to fund to help make, to help with that transfer of funding or dollars of access revenue.

But we think it can and should happen.

I think we are, as you said, the emphasis by the FCC is going teleconference awhile before they focus on this again -- it's going to be awhile, maybe the third quarter of the year but I think there's enough history there that they will come back with some proposals and start working with the industry on moving toward a more unified rate and reforming access basically.

Great, thanks, guys.

(Operator Instructions).

Our next question comes from Nicholas Netchvolodoff.

A question on the regulatory front, please.

I notice you filed a notice in New Jersey indicating that you do not require change of license transfer type of approval.

The state doesn't seem to have responded to that stance.

Could you update us on that?

It seems it could endanger the June closing.

In New Jersey we really don't think that's an issue with the state.

We think they are on board with our position there.

We haven't had an official response, but we are in continually in touch with them, talking with them.

We think it's just a matter of time before we will have approval there in New Jersey.

Thank you.

Our next question comes from [Alan Bear].

Good morning.

What about the dividend policy for this year, is there any change?

No, Alan no change on the dividend policy this year.

We still expect in the 50% pay out range and even after the Embarq acquisition, we've announced that's our goal, our dividend for now is will remain at the $2.80 level.

Thank you.

This concludes our question and answer session for today's conference.

I would now like to turn the conference over to Mr.

Glen Post for any closing remarks.

Nu, just a couple of operating points I want to make.

We did grow consumer wallet share from a little less than $44 per customer to nearly $50 per customer year-over-year.

So 13.5% increase in ARPU there so it's been a major focus of ours.

We are pleased with that.

Our line losses have increased in both consumer and business segment.

We continue to be encouraged by the trend in markets.

We've had cable competition for more than six months as line losses in those markets have improved over 6% year over year.

And finally we we think there are going to be ways to drive additional broadband services over time.

We continue to experience solid growth in our IPTV product in Columbia and Lacrosse and we are pleased with the service we are making there.

We are seeing some significant impact, positive impacts on customer churn where we have the video product.

So we will continue to pursue expansion of that service as it's feasible especially with the Embarq acquisition looking at opportunities in their markets to expand that service.

In closing CenturyTel concluded 2008 with strong fourth quarter and full year financial results especially in light of the challenging economic environment that we faced.

We believe we are well-positioned to enter 2009.

We will remain focused in the months ahead on improving customer retention and expanding our market share.

We will continue to work diligently toward the completion of the Embarq merger.

We believe that the CenturyTel Embarq combination represents great strategic opportunities that will diversify our markets.

In addition, our combined high quality broadband networks and our IT systems along with our enhanced financial and operational scale should provide significant advantages for our customers.

We appreciate your participating in our call today and we look forward to speaking with you in the week and months ahead.

Ladies and gentlemen, this for participating in today's conference.

This concludes our program for today.

You may all disconnect and have a nice day.